Do IPOs Always Kill Progress?

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Statistically speaking, very few startups will climb to the level of being bought, widely covered in the media and eventually also having a very “P” IPO. It is difficult these days to read business news without seeing that little run of alphabet soup. Lately there’s been talk of Twitter’s IPO (ahead of which, Twitter is vying to get involved with TV networks to become even more ubiquitous), and it’s hard not to recall Tumblr’s bump up in the world by being snatched up by Yahoo.

The general attitude about these bumps up is that they kill “innovation,” a word that I hate, but what it represents and what people actually mean by it is that companies stop progressing and evolving and become much, much more risk-averse. It makes sense, and I get it.

So why does this happen?

“Many young companies turn to seasoned CEOs rather than the visionaries that founded the business,” says Howard Orloff, co-founder and managing director of IPOvillage.com. “These veteran CEOs are used to working with Wall Street and managing ‘to the quarter.’”

Orloff adds, “It takes strong leadership and vision to ignore the pressure put on management... and keep the focus on the long-term business strategy.”

But obviously, once you are beholden to the public, it can become more of a hard sell to stay risky when there’s so much more for so many more people to lose.

“A good mechanism to protect growth is to make sure that you have demonstrated a history of financial strength ahead of the IPO,” says Brian Hamilton, chairman of Sageworks. “ The floor of the New York Stock Exchange is littered with companies that went public when they shouldn’t have.”

So, this sounds quite a bit counter-intuitive, but Hamilton suggests that you don’t go public to make a quick cash grab, but instead to smartly grow what you’ve already gotten. “A history of profitability and positive sales growth, at least, indicates that the company is able to generate revenues, finance the operations of those revenues and manage the company in a manner that results in a profit. The value of a company’s assets should show a track record of improving financial performance before the IPO.”

So, that explains that — and if you don’t want it to happen to you, take your time. After all, what’s the rush anyway?